Case Study

UK Replica Football Kit Prices: Foul!

PRELIMINARY TEACHING NOTE

CASE SYNOPSIS

This case illustrates the complexity and extensiveness of cartel activity with reference to the UK replica football kit market. From the beginning of February 2000 to the end of November 2001 a total of 10 parties were implicated in price-fixing agreements. Three groups of agreements and/or concerted practices that involved adult short sleeved replica football shirts (and junior and infant replica football kit in the case of the England team) of Manchester United, Chelsea, Glasgow Celtic and Nottingham Forest Football Clubs were in operation at different time intervals.

PURPOSE

The case is designed for the discussion of illegal price-fixing arrangements and identification of the extent to which opportunities to cheat may exist. Students should identify particular product features which facilitate opportunities for the extraction of monopoly rents and the extent to which an oligopolistic market structure provides the favourable environment for anti-competitive conduct.

The case can also be used to examine regulatory issues, from both the government and the firm perspective. The government has a vested interest in moving economic activity towards a generally more competitive context and uses competition policy to this end. Small firms in particular play a significant role in this context and its important that they are free to operate under fair conditions.

Students, particularly postgraduate business students may also use the case to examine firm strategic decision-making and the extent to which unethical behaviour may also be considered an option. Global firms operate within an increasingly competitive environment dominated by a few big players and face increasing pressure from share holders to deliver yet greater profitability.

BASIC PRINCIPLES/CONCEPTS

Oligopolistic market structures and interdependence considerations (vs. the Competitive alternative).

Game theory application.

Collusive practices broadly and price fixing specifically

Welfare concepts (Pareto optimality), Deadweight loss; Efficiency constraints.

Second best solution.

Information asymmetry

TEACHING METHODS

The case is written primarily for advanced/intermediate (second/third year) economics majors but could also be used on an introductory economics programme of a postgraduate course. It is expected that students would already have covered/been introduced to the range of market structures (perfect competition through to monopoly) and students would be able to compare and contrast the different efficiency/welfare outcomes associated with each market structure.

The case is designed to be discussed in one class session of approximately one and a half to two hours duration. Dependent on the class background a varying mix of case questions can be used. It is not anticipated that necessarily all questions will be used during one session. For example, economics majors would benefit from questions 2 and 3 in particular, based on knowledge of more complex economic concepts, (pareto optimality, deadweight loss, etc). Business students may have a greater interest in the strategic dimension, for example how should firms exploit the growing popularity of an activity; how should they respond to a perceived regulatory increase. Three questions should be sufficient for the session based on small groups reporting back during a plenary session.

The case questions have been devised to accurately reflect the divergent economic competence of the two groups such that advanced economic undergraduate students would be able to incorporate knowledge of Bertrand/Cournot oligopolistic models and develop further on welfare consequences beyond the acknowledgement of price/output to include deadweight loss and pareto optimal concepts. The case provides students with the opportunity to develop their analytical skills with respect to the application of theoretical economic concepts and to the consideration of regulatory issues.

TEACHING GUIDE SUMMARY

Concepts: Learning points:

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1. Oligopolistic market structures.

2. Collusive v. Non-Collusive conduct

3. Welfare consequences of price-

fixing

4. Economic regulation

  • Industry dominance by a small number of large firms
  • Interdependence constraint on behaviour.
  • Barriers to entry and abnormal profits
  • Kinked demand curve*
  • Cournot and Bertrand duopoly analysis*
  • Explanation of Nash equilibrium*
  • Game theory strategic analysis
  • Prisoner’s dilemma
  • Collusion and risk avoidance*
  • Information asymmetry and cheating within agreement*
  • Unfair competition, demand = supply equilibrium undermined
  • Potentially higher prices and less choice.
  • Divergence from pareto optimal outcome.*
  • Distributional concerns, shifting of consumer surplus to producer surplus*
  • Explanation of deadweight loss.
  • Information asymmetry and the difficulties of regulation.
  • Problems of over/under regulation and the business consequences, e.g. disincentive effects, small business increased costs.
  • Explanation of regulatory capture.

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